10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 3, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38035
______________________________
(Exact name of registrant as specified in its charter)
______________________________
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(432 ) 688-0012
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |||||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of the registrant’s common shares, par value $0.001 per share, outstanding at July 31, 2023, was 112,772,097 .
PROPETRO HOLDING CORP.
TABLE OF CONTENTS
Page | |||||||||||
-i-
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this Form 10-Q are forward-looking statements. Forward-looking statements are all statements other than statements of historical facts, and give our expectations or forecasts of future events as of the effective date of this Form 10-Q. Words such as "may," "could," "plan," "project," "budget," "predict," "pursue," "target," "seek," "objective," "believe," "expect," "anticipate," "intend," "estimate," "will," "should" and similar expressions are generally used to identify forward-looking statements. These statements include, but are not limited to statements about our business strategy, industry, future profitability, future capital expenditures, our fleet conversion strategy and our share repurchase program. Such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those implied or projected by the forward-looking statements. Factors that could cause our actual results to differ materially from those contemplated by such forward-looking statements include:
•changes in general economic and geopolitical conditions, including increasing interest rates, the rate of inflation and potential economic recession;
•central bank policy actions, bank failures and associated liquidity risks and other factors;
•the severity and duration of any world events and armed conflict, including the Russian-Ukraine war and associated repercussions to supply and demand for oil and gas and the economy generally;
•the actions taken by the members of the Organization of the Petroleum Exporting Countries ("OPEC") and Russia (together with OPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations;
•actions taken by the Biden Administration, such as executive orders or new regulations, that may negatively impact the future production of oil and natural gas in the United States and may adversely affect our future operations;
•the level of production and resulting market prices for crude oil, natural gas and other hydrocarbons;
•the effects of existing and future laws and governmental regulations (or the interpretation thereof) on us, our suppliers and our customers;
•cost increases and supply chain constraints related to our services;
•competitive conditions in our industry;
•our ability to attract and retain employees;
•changes in the long-term supply of, and demand for, oil and natural gas;
•actions taken by our customers, suppliers, competitors and third-party operators and the possible loss of customers or work to our competitors;
•technological changes, including lower emissions oilfield services equipment and similar advancements;
•changes in the availability and cost of capital;
•our ability to successfully implement our business plan, including execution of potential mergers and acquisitions;
•large or multiple customer defaults, including defaults resulting from actual or potential insolvencies;
•the effects of consolidation on our customers or competitors;
•the price and availability of debt and equity financing (including increasing interest rates) for the Company and our customers;
•our ability to complete growth projects on time and on budget;
•increases in tax rates or types of taxes enacted that specifically impact E&P and related operations resulting in changes in the amount of taxes owed by us;
•regulatory and related policy actions intended by federal, state and/or local governments to reduce fossil fuel use and associated carbon emissions, or to drive the substitution of renewable forms of energy for oil and gas, may over time reduce demand for oil and gas and therefore the demand for our services;
-ii-
•new or expanded regulations that materially limit our customers’ access to federal and state lands for oil and gas development, thereby reducing demand for our services in the affected areas;
•growing demand for electric vehicles that result in reduced demand for gasoline and therefore the demand for our services;
•our ability to successfully implement technological developments and enhancements, including our new Tier IV DGB and electric hydraulic fracturing equipment, and other lower-emissions equipment we may acquire or that may be sought by our customers;
•the projected timing, purchase price and number of shares purchased under our share repurchase program, the sources of funds under the repurchase program and the impacts of the repurchase program;
•operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, such as fires, which risks may be self-insured, or may not be fully covered under our insurance programs;
•exposure to cyber-security events which could cause operational disruptions or reputational harm;
•acts of terrorism, war or political or civil unrest in the United States or elsewhere; and
•the effects of current and future litigation.
Whether actual results and developments will conform with our expectations and predictions contained in forward-looking statements is subject to a number of risks and uncertainties which could cause actual results to differ materially from such expectations and predictions, including, without limitation, in addition to those specified in the text surrounding such statements, the risks described under Part II, Item 1A, "Risk Factors" in this Form 10-Q and elsewhere throughout this report, the risks described under Part I, Item 1A, "Risk Factors" in our Form 10-K for the year ended December 31, 2022, filed with the SEC (the "Form 10-K") and elsewhere throughout that report, and other risks, many of which are beyond our control.
Readers are cautioned not to place undue reliance on our forward-looking statements, which are made as of the date of this Form 10-Q. We do not undertake, and expressly disclaim, any duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. Investors are also advised to carefully review and consider the various risks and other disclosures discussed in our SEC reports, including the risk factors described in the Form 10-K.
-iii-
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||
CURRENT ASSETS: | ||||||||||||||
Cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
Accounts receivable - net of allowance for credit losses of $ |
||||||||||||||
Inventories | ||||||||||||||
Prepaid expenses | ||||||||||||||
Short-term investment, net | ||||||||||||||
Other current assets | ||||||||||||||
Total current assets | ||||||||||||||
PROPERTY AND EQUIPMENT - net of accumulated depreciation | ||||||||||||||
OPERATING LEASE RIGHT-OF-USE ASSETS |
||||||||||||||
OTHER NONCURRENT ASSETS: |
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Goodwill | ||||||||||||||
Intangible assets - net of amortization | ||||||||||||||
Other noncurrent assets | ||||||||||||||
Total other noncurrent assets | ||||||||||||||
TOTAL ASSETS | $ | $ | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||
Accounts payable | $ | $ | ||||||||||||
Accrued and other current liabilities | ||||||||||||||
Operating lease liabilities | ||||||||||||||
Total current liabilities | ||||||||||||||
DEFERRED INCOME TAXES | ||||||||||||||
LONG-TERM DEBT | ||||||||||||||
NONCURRENT OPERATING LEASE LIABILITIES | ||||||||||||||
Total liabilities | ||||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 13) | ||||||||||||||
SHAREHOLDERS’ EQUITY: | ||||||||||||||
Preferred stock, $ |
||||||||||||||
Common stock, $ |
||||||||||||||
Additional paid-in capital | ||||||||||||||
Retained earnings (accumulated deficit) | ( |
|||||||||||||
Total shareholders’ equity | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ |
See notes to condensed consolidated financial statements.
-1-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
REVENUE - |
$ | $ | $ | $ | ||||||||||||||||||||||
COSTS AND EXPENSES | ||||||||||||||||||||||||||
Cost of services (exclusive of depreciation and amortization) | ||||||||||||||||||||||||||
General and administrative expenses (inclusive of stock-based compensation) | ||||||||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||
Impairment expense | ||||||||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||||||||
Total costs and expenses | ||||||||||||||||||||||||||
OPERATING INCOME (LOSS) | ( |
( |
||||||||||||||||||||||||
OTHER (EXPENSE) INCOME: | ||||||||||||||||||||||||||
Interest expense | ( |
( |
( |
( |
||||||||||||||||||||||
Other income (expense) | ( |
|||||||||||||||||||||||||
Total other (expense) income | ( |
( |
( |
|||||||||||||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES | ( |
( |
||||||||||||||||||||||||
INCOME TAX (EXPENSE) BENEFIT | ( |
( |
||||||||||||||||||||||||
NET INCOME (LOSS) | $ | $ | ( |
$ | $ | ( |
||||||||||||||||||||
NET INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||||||||||||
Basic | $ | $ | ( |
$ | $ | ( |
||||||||||||||||||||
Diluted | $ | $ | ( |
$ | $ | ( |
||||||||||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||
Diluted |
See notes to condensed consolidated financial statements.
-2-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2023 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | ( |
— | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
BALANCE - March 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | — | |||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Share repurchases | ( |
( |
( |
— | ( |
|||||||||||||||||||||||||||
Excise tax on share repurchases | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
BALANCE - June 30, 2023 | $ | $ | $ | $ |
Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||||
BALANCE - January 1, 2022 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | |||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net income | — | — | — | |||||||||||||||||||||||||||||
BALANCE - March 31, 2022 | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||
Stock-based compensation cost | — | — | — | |||||||||||||||||||||||||||||
Issuance of equity awards, net | — | — | ||||||||||||||||||||||||||||||
Tax withholdings paid for net settlement of equity awards | — | — | ( |
— | ( |
|||||||||||||||||||||||||||
Net loss | — | — | — | ( |
( |
|||||||||||||||||||||||||||
BALANCE - June 30, 2022 | $ | $ | $ | ( |
$ |
See notes to condensed consolidated financial statements.
-3-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
Net income (loss) | $ | $ | ( |
|||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | ||||||||||||||
Impairment expense | ||||||||||||||
Deferred income tax expense | ( |
|||||||||||||
Amortization of deferred debt issuance costs | ||||||||||||||
Stock-based compensation | ||||||||||||||
Loss on disposal of assets | ||||||||||||||
Unrealized loss on short-term investment | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Accounts receivable | ( |
( |
||||||||||||
Other current assets | ( |
|||||||||||||
Inventories | ( |
|||||||||||||
Prepaid expenses | ( |
|||||||||||||
Accounts payable | ( |
( |
||||||||||||
Accrued and other current liabilities | ||||||||||||||
Accrued interest | ||||||||||||||
Net cash provided by operating activities | ||||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
Capital expenditures | ( |
( |
||||||||||||
Proceeds from sale of assets | ||||||||||||||
Net cash used in investing activities | ( |
( |
||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
Proceeds from borrowings | ||||||||||||||
Payment of debt issuance costs | ( |
( |
||||||||||||
Proceeds from exercise of equity awards | ||||||||||||||
Tax withholdings paid for net settlement of equity awards | ( |
( |
||||||||||||
Share repurchases | ( |
|||||||||||||
Net cash provided by (used in) financing activities | ( |
|||||||||||||
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( |
( |
||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period | ||||||||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period | $ | $ | ||||||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||||
Capital expenditures included in accounts payable and accrued liabilities | $ | $ |
See notes to condensed consolidated financial statements.
-4-
PROPETRO HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed consolidated balance sheets:
Six Months Ended June 30, | |||||||||||
2023 | 2022 | ||||||||||
Summary of cash, cash equivalents and restricted cash | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash | |||||||||||
Total cash, cash equivalents and restricted cash — End of period | $ | $ |
See notes to condensed consolidated financial statements.
-5-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
Revenue Recognition
The Company’s services are sold based upon contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer. The following is a description of the principal activities, aggregated into one reportable segment—"Completion Services," from which the Company generates its revenue and "All Other" category.
Completion Services — Completion Services consists of downhole pumping services, which includes hydraulic fracturing, cementing and wireline operations.
Hydraulic fracturing is an oil well completion technique, which is part of the overall well completion process. It is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of shale wellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. Our hydraulic fracturing contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed accurately depicts how our hydraulic fracturing services are transferred to our customers over time. In addition, certain of our hydraulic fracturing equipment may be entitled to reservation fee charges if a customer were to reserve committed hydraulic fracturing equipment. The Company recognizes revenue related to reservation fee charges on a daily basis as the performance obligations are met.
Acidizing, which is part of our hydraulic fracturing operating segment, involves a well-stimulation technique where acid or similar chemicals are injected under pressure into formations to form or expand fissures. Our acidizing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service or sale of the acid or chemical when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize acidizing revenue at a point-in-time, upon completion of the performance obligation.
Our cementing services use pressure pumping equipment to deliver a slurry of liquid cement that is pumped down a well between the casing and the borehole. Our cementing contracts have one performance obligation, satisfied at a point-in-time, upon completion of the contracted service when control is transferred to the customer. Jobs for these services are typically short term in nature, with most jobs completed in less than a day. We recognize cementing revenue at a point-in-time, upon completion of the performance obligation.
Wireline services (including pumpdown) are oil well completion techniques, which are part of the well completion process. Our wireline services utilize equipment with a drum of wireline to deploy perforating guns in the well to perforate the casing, cement, and formation. Once the well is perforated, the well can be fractured. Pumpdown utilizes pressure pumping equipment to pump water into the well to deploy perforating guns attached to wireline through the lateral section of a well. Our wireline contracts with our customers have one performance obligation, which is the contracted total stages, satisfied over time. We recognize revenue over time using a progress output, unit-of-work performed method, which is based on the agreed fixed transaction price and actual stages completed. We believe that recognizing revenue based on actual stages completed accurately depicts how our wireline services are transferred to our customers over time. In addition, certain of our wireline equipment is entitled to daily equipment charges while the equipment is on the customer’s locations. The Company recognizes revenue related to daily equipment charges on a daily basis as the performance obligations are met.
The transaction price for each performance obligation for all our completion services is fixed per our contracts with our customers.
-6-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Restricted Cash and Customer Cash Advances
Our restricted cash relates to cash advances received from a customer in connection with our contract with the customer to provide electric hydraulic fracturing equipment and services. The restricted cash will be used to pay for contractually agreed upon expenditures. The cash advances from the customer will be credited towards the customer’s invoice as our revenue performance obligations are met over the contract period. Our restricted cash balances as of June 30, 2023 and December 31, 2022, were $12.2 million and $10.0 million, respectively.
The cash advances received represent contract liabilities in connection with the performance of certain completion services. The cash advance (contract liability) balances, which are included in accrued and other current liabilities in our condensed consolidated balance sheets, were $20.3 million and $10.0 million as of June 30, 2023 and December 31, 2022, respectively. During the six months ended June 30, 2023, we recognized revenue of $2.7 million from the cash advance amount outstanding at the beginning of the period.
Accounts Receivable
Accounts receivables are stated at the amount billed and billable to customers. At June 30, 2023 and December 31, 2022, accrued revenue (unbilled receivable) included as part of our accounts receivable was $54.2 million and $51.9 million, respectively. At June 30, 2023, the transaction price allocated to the remaining performance obligation for our partially completed hydraulic fracturing and wireline operations was $83.5 million, which is expected to be completed and recognized as revenue within one month following the current period balance sheet date.
Allowance for Credit Losses
As of June 30, 2023, the Company had $0.2 million allowance for credit losses. Our allowance for credit losses is based on the evaluation of both our historic collection experience and the economic outlook for the oil and gas industry. We evaluated the historic loss experience on our accounts receivable and also considered separately customers with receivable balances that may be negatively impacted by current or future economic developments and market conditions. While the Company has not experienced significant credit losses in the past and has not yet seen material adverse changes to the payment patterns of its customers, the Company cannot predict with any certainty the degree to which the impacts of depressed economic activities, including the potential impact of periodically adjusted borrowing base limits, level of hedged production, or unforeseen well shut-downs may affect the ability of its customers to timely pay receivables when due. Accordingly, in future periods, the Company may revise its estimates of expected credit losses.
The table below shows a summary of allowance for credit losses during the six months ended June 30, 2023:
(in thousands) | |||||
Balance - January 1, 2023 | $ | ||||
Provision for credit losses during the period | |||||
Write-off during the period | ( |
||||
Balance - June 30, 2023 | $ |
-7-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (Continued)
Change in Accounting Estimates
Current trends in hydraulic fracturing equipment operating conditions such as larger pads, changes to job design and increased pumping hours per day have resulted in shorter useful lives for certain critical components that are included in our property and equipment assets. These recent trends necessitated a review of useful lives of our critical components like fluid ends, power ends, hydraulic fracturing units and other components in the first quarter of 2023. We determined that the estimated useful life of fluid ends is now less than one year, resulting in our determination that costs associated with the replacement of these components will no longer be capitalized, but instead recorded in inventories and amortized to cost of services over their estimated useful life. We have also shortened the estimated useful lives of power ends to two years from five years and hydraulic fracturing units to ten years from fifteen years . This change in accounting estimates was made effective January 1, 2023 and accounted for prospectively. The net effect of this change for the three and six months ended June 30, 2023 was a $3.9 million and $7.3 million decrease in net income, or $0.03 and $0.06 per basic and diluted share, respectively.
Additionally, in connection with the review of our power ends estimated useful life, effective January 1, 2023, we are accelerating the depreciation of the remaining book value of power ends that prematurely fail. In 2022, we wrote off the remaining book value of prematurely failed and disposed of power ends to loss on disposal of assets. The amounts included in depreciation in connection with premature failure of power ends and other components during the three and six months ended June 30, 2023 were $11.8 million and $24.3 million, respectively. Furthermore, to conform to current period presentation, we have reclassified the amounts relating to premature failure of power ends previously included in loss on disposal of assets to depreciation expense for prior periods. The amounts reclassified were $9.5 million and $15.7 million, which relate to the three and six months ended June 30, 2022, respectively.
Depreciation and Amortization
Depreciation and amortization comprised of the following:
(in thousands) | |||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Depreciation and amortization related to cost of services | $ | $ | $ | $ | |||||||||||||||||||
Depreciation and amortization related to general and administrative expenses | |||||||||||||||||||||||
Total depreciation and amortization | $ | $ | $ | $ |
Note 2 - Recently Issued Accounting Standards
Note 3 - Silvertip Acquisition
-8-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Silvertip Acquisition (Continued)
certain closing and transaction costs (the "Silvertip Acquisition"). The Silvertip Acquisition positions the Company as a more integrated completions-focused oilfield services provider headquartered in the Permian Basin.
The Company accounted for the Silvertip Acquisition using the acquisition method of accounting. The Silvertip Purchase Price was allocated to the major categories of assets acquired and liabilities assumed based upon their estimated fair value at the Silvertip Acquisition Date. The estimated fair values of certain assets and liabilities, including accounts receivable, require significant judgments and estimates. The measurements of assets acquired and liabilities assumed, are based on inputs that are not observable in the market and thus represent Level 3 inputs.
The following table summarizes the fair value of the consideration transferred in the Silvertip Acquisition and the Silvertip Purchase Price to the fair value of the assets acquired and liabilities assumed (which are included within the accompanying condensed consolidated balance sheets) as of the Silvertip Acquisition Date:
(in thousands) | |||||
Total Purchase Consideration: | |||||
Cash consideration | $ | ||||
Equity consideration | |||||
Debt payments and closing costs | |||||
Total consideration | $ | ||||
Cash and cash equivalents | $ | ||||
Accounts receivable and unbilled revenue | |||||
Inventories | |||||
Prepaid expenses | |||||
Other current assets | |||||
Property and equipment (1)
|
|||||
Intangible assets: | |||||
Trademark/trade name (2)
|
|||||
Customer relationships (2)
|
|||||
Goodwill | |||||
Operating lease right-of-use asset | |||||
Total identifiable assets acquired | |||||
Accounts payable | |||||
Accrued and other current liabilities | |||||
Operating lease liability | |||||
Total liabilities assumed | |||||
Total purchase consideration | $ |
(1)Remaining useful lives ranging from less than 22 years
to
(2)Definite lived intangibles with amortization period of 10 years.
The goodwill arising from the Silvertip Acquisition is attributable to the expected operational synergies resulting from our integrated service offerings. The goodwill arising from the Silvertip Acquisition has been allocated to our wireline operations and is included in our wireline operating segment.
Note 4 - Fair Value Measurements
Fair value ("FV") is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by
-9-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
requiring that the most observable inputs be used, when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2 — Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair values of cash, cash equivalents and restricted cash, accounts receivable, accounts payable, accrued and other current liabilities, and long-term debt are estimated to be approximately equivalent to carrying amounts as of June 30, 2023 and December 31, 2022 and have been excluded from the table below.
Assets measured at fair value on a recurring basis are set forth below:
(in thousands) | |||||||||||||||||||||||||||||
Estimated fair value measurements | |||||||||||||||||||||||||||||
Balance | Quoted prices in active market (Level 1) |
Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Total gains (losses) |
|||||||||||||||||||||||||
June 30, 2023: | |||||||||||||||||||||||||||||
Short-term investment | $ | $ | $ | $ | $ | ( |
|||||||||||||||||||||||
December 31, 2022: | |||||||||||||||||||||||||||||
Short-term investment | $ | $ | $ | $ | $ | ( |
Short-term investment— On September 1, 2022, the Company received 2.6 million common shares of STEP Energy Services Ltd. ("STEP") with an estimated fair value of $11.8 million as part of the consideration for the sale of our coiled tubing assets to STEP. The shares were treated as an investment in equity securities measured at fair value using Level 1 inputs based on observable prices on the Toronto Stock Exchange and are shown under current assets in our condensed consolidated balance sheets. As of June 30, 2023, the fair value of the short-term investment was estimated at $6.4 million. The unrealized loss resulting from the fluctuation in stock price was $0.1 million and $3.9 million during the three and six months ended June 30, 2023, respectively. Included in the unrealized loss was a gain of $0.1 million resulting from non-cash foreign currency translation during the three and six months ended June 30, 2023. The unrealized loss resulting from stock price fluctuation and the unrealized gain resulting from non-cash foreign currency translation are included in other income (expense) in our condensed consolidated statements of operations.
-10-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Fair Value Measurements (Continued)
Assets Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but may be subject to fair value adjustments in certain circumstances. These assets and liabilities include those acquired through the Silvertip Acquisition, which are required to be measured at fair value on the acquisition date according to the FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations.
Whenever events or circumstances indicate that the carrying value of long-lived assets may not be recoverable, the Company reviews the carrying value of long‑lived assets, such as property and equipment and other assets to determine if they are recoverable. If any long‑lived assets are determined to be unrecoverable, an impairment expense is recorded in the period. No impairment of property and equipment was recorded during the six months ended June 30, 2023. We recorded impairment expense of approximately $57.5 million during the six months ended June 30, 2022.
As of June 30, 2023 and December 31, 2022, our goodwill carrying value was $23.6 million and $23.6 million, respectively. There were no additions to goodwill during the three and six months ended June 30, 2023 and 2022. The wireline operating segment is the only segment with goodwill at June 30, 2023 and December 31, 2022. There were no goodwill impairment losses during the three and six months ended June 30, 2023 and 2022. We conducted our annual impairment test of goodwill in accordance with ASC 850, Intangibles—Goodwill and Other, as of December 31, 2022 and determined that no impairment to the carrying value of goodwill for our reporting unit (wireline operating segment) was required.
Note 5 - Intangible Assets
Intangible assets consist of customer relationships and trademark/trade name. Intangible assets are amortized on a straight‑line basis with a useful life of ten years . Amortization expense included in net income for the three and six months ended June 30, 2023 was $1.4 million and $2.9 million, respectively. There was no amortization expense during the three and six months ended June 30, 2022. The Company’s intangible assets subject to amortization consisted of the following:
(in thousands) |
|||||||||||
June 30, 2023 | December 31, 2022 | ||||||||||
Intangible assets acquired: | |||||||||||
Trademark/trade name | $ | $ | |||||||||
Customer relationships | |||||||||||
Total intangible assets acquired | |||||||||||
Accumulated amortization: | |||||||||||
Trademark/trade name | ( |
( |
|||||||||
Customer relationships | ( |
( |
|||||||||
Total accumulated amortization | ( |
( |
|||||||||
Intangible assets — net | $ | $ |
The average amortization period for our remaining intangible assets is approximately 9.3 years. Estimated remaining amortization expense for each of the subsequent fiscal years is expected to be as follows:
(in thousands) |
|||||
Year | Estimated future amortization expense | ||||
2023 | $ | ||||
2024 | |||||
2025 | |||||
2026 | |||||
2027 and beyond | |||||
Total | $ |
-11-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 - Long-Term Debt
Asset-Based Loan ("ABL") Credit Facility
Our revolving credit facility, as amended and restated in April 2022, prior to giving effect to the amendment to the revolving credit facility in June 2023, had a total borrowing capacity of $150.0 million. The revolving credit facility had a borrowing base of 85 % to 90 %, depending on the credit ratings of our accounts receivable counterparties, of monthly eligible accounts receivable less customary reserves. The revolving credit facility included a springing fixed charge coverage ratio to apply when excess availability was less than the greater of (i) 10 % of the lesser of the facility size or the borrowing base or (ii) $10.0 million. Under the revolving credit facility we were required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens, indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities.
Effective June 2, 2023, the Company entered into an amendment to its amended and restated revolving credit facility (the revolving credit facility, as amended and restated in April 2022, as amended in June 2023 and as may be amended further, "ABL Credit Facility"). The amendment increased the borrowing capacity under the ABL Credit Facility to $225.0 million (subject to the Borrowing Base (as defined below) limit), and extended the maturity date to June 2, 2028. The ABL Credit Facility has a borrowing base of the sum of 85 % to 90 % of monthly eligible accounts receivable and 80 % of eligible unbilled accounts (up to a maximum of 25 % of the Borrowing Base) less customary reserves (the "Borrowing Base"), in each case, depending on the credit ratings of our accounts receivable counterparties, as redetermined monthly. The Borrowing Base as of June 30, 2023, was approximately $173.5 million. The ABL Credit Facility includes a springing fixed charge coverage ratio to apply when excess availability is less than the greater of (i) 10 % of the lesser of the facility size or the Borrowing Base or (ii) $15.0 million. Under the ABL Credit Facility we are required to comply, subject to certain exceptions and materiality qualifiers, with certain customary affirmative and negative covenants, including, but not limited to, covenants pertaining to our ability to incur liens or indebtedness, changes in the nature of our business, mergers and other fundamental changes, disposal of assets, investments and restricted payments, amendments to our organizational documents or accounting policies, prepayments of certain debt, dividends, transactions with affiliates, and certain other activities. Borrowings under the ABL Credit Facility are secured by a first priority lien and security interest in substantially all assets of the Company.
Borrowings under the ABL Credit Facility accrue interest based on a three-tier pricing grid tied to availability, and we may elect for loans to be based on either the Secured Overnight Financing Rate ("SOFR") or the base rate, plus the applicable margin, which ranges from 1.75 % to 2.25 % for SOFR loans and 0.75 % to 1.25 % for base rate loans. For the six months ended June 30, 2023, the weighted average interest rate on our outstanding borrowings under the ABL Credit Facility was 6.21 %.
Note 7 - Reportable Segment Information
The Company currently has three operating segments for which discrete financial information is readily available: hydraulic fracturing (inclusive of acidizing), cementing and wireline. These operating segments represent how the Chief Operating Decision Maker evaluates performance and allocates resources.
On September 1, 2022, the Company shut down its coiled tubing operations and disposed of its coiled tubing assets to STEP as part of a strategic repositioning, and recorded a loss on disposal of $13.8 million. The divestiture of our coiled tubing assets did not qualify for presentation and disclosure as discontinued operations, and accordingly, we have recorded the resulting loss from the disposal of assets in our condensed consolidated statement of operations. Following the divestiture of our coiled tubing operations, which were historically included in the "All Other" category, and the Silvertip Acquisition, which resulted in our new wireline operations in 2022, we have three operating segments. All three remaining operating segments are now aggregated into Completion Services, which is our only reportable segment.
-12-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
In accordance with ASC 280—Segment Reporting, the Company has one reportable segment (Completion Services) comprised of the hydraulic fracturing, cementing and wireline operating segments. The Silvertip Acquisition which resulted in the addition of a new wireline operating segment, and the disposal of our coiled tubing operations (previously included in the "All Other" category), collectively resulted in a change to the structure and composition of our reportable segment and "All Other" category. Our previous Pressure Pumping reportable segment is now renamed "Completion Services" because of the inclusion of the new wireline completion services. In addition, we have reclassified all our corporate overhead costs (inclusive of income taxes and interest expense) previously included in the "All Other" category to the Completion Services reportable segment. As a result of the change in the structure and composition of our reportable segment, we have reclassified the presentation of our segment disclosure for the three and six months ended June 30, 2022 to include corporate costs in our Completion Services reportable segment to make this period comparable to the three and six months ended June 30, 2023. Total corporate administrative expense for the three and six months ended June 30, 2023 was $26.9 million and $52.2 million, respectively. Total corporate administrative expense for the three and six months ended June 30, 2022 was $7.7 million and $25.0 million, respectively.
A breakout of our Completion Services revenue by operating segment for the three and six months ended June 30, 2023 and 2022 is presented below:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
Hydraulic fracturing revenue | % | % | % | % | ||||||||||||||||||||||
Cementing revenue | % | % | % | % | ||||||||||||||||||||||
Wireline revenue | % | % | % | % | ||||||||||||||||||||||
Total Completion Services revenue | % | % | % | % |
Inter-segment revenues are not material and are not shown separately in the table below.
The Company manages and assesses the performance of the reportable segment by its adjusted EBITDA (earnings before other income (expense), interest expense, income taxes, depreciation and amortization, stock-based compensation expense, retention bonuses, severance and related expense, impairment expense, (gain)/loss on disposal of assets and other unusual or nonrecurring expenses or (income)).
-13-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
A reconciliation from segment level financial information to the consolidated statements of operations is provided in the table below (in thousands):
Three Months Ended June 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Goodwill at June 30, 2023 | $ | $ | $ | |||||||||||||||||
Total assets at June 30, 2023 | $ | $ | $ |
Three Months Ended June 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets December 31, 2022 | $ | $ | $ |
Six Months Ended June 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Goodwill at June 30, 2023 | $ | $ | $ | |||||||||||||||||
Total assets June 30, 2023 | $ | $ | $ |
Six Months Ended June 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Service revenue | $ | $ | $ | |||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | $ | $ | $ | |||||||||||||||||
Capital expenditures | $ | $ | $ | |||||||||||||||||
Total assets December 31, 2022 | $ | $ | $ |
-14-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
Reconciliation of net income (loss) to adjusted EBITDA (in thousands):
Three Months Ended June 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net income | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax expense | ||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income (1)
|
( |
( |
||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Retention bonus and severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Three Months Ended June 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net loss | $ | ( |
$ | ( |
$ | ( |
||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Impairment expense | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income | ( |
( |
||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ |
-15-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Reportable Segment Information (Continued)
Six Months Ended June 30, 2023 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net income | $ | $ | $ | |||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax expense | ||||||||||||||||||||
Loss on disposal of assets | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other expense (1)
|
||||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
Six Months Ended June 30, 2022 | ||||||||||||||||||||
Completion Services | All Other | Total | ||||||||||||||||||
Net loss | $ | ( |
$ | ( |
$ | ( |
||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Impairment expense | ||||||||||||||||||||
Interest expense | ||||||||||||||||||||
Income tax benefit | ( |
( |
||||||||||||||||||
Loss (gain) on disposal of assets | ( |
|||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||
Other income (3)
|
( |
( |
||||||||||||||||||
Other general and administrative expense, (net) (2)
|
||||||||||||||||||||
Severance expense | ||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ |
(1)Includes unrealized loss on short-term investment of $0.1 million and $3.9 million for the three and six months ended June 30, 2023, respectively.
(2)Other general and administrative expense, (net of reimbursement from insurance carriers) primarily relates to nonrecurring professional fees paid to external consultants in connection with our audit committee review, SEC investigation, shareholder litigation, legal settlement to a vendor and other legal matters, net of insurance recoveries. During the three and six months ended June 30, 2023, we received reimbursement of approximately $0 and $0.3 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. During the three and six months ended June 30, 2022, we received reimbursement of approximately $2.4 million and $3.5 million, respectively, from our insurance carriers in connection with the SEC investigation and shareholder litigation. See "Note 13 - Commitments and Contingencies—Contingent Liabilities—Legal Matters" for further information.
(3)Includes a $10.7 million net tax refund (net of advisory fees) received in March 2022 from the Texas Comptroller of Public Accounts in connection with limited sales, excise and use tax audit of the period July 1, 2015 through December 31, 2018.
-16-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing the net income (loss) relevant to the common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share uses the same net income divided by the sum of the weighted average number of shares of common stock outstanding during the period, plus dilutive effects of options, performance and restricted stock units outstanding during the period calculated using the treasury method and the potential dilutive effects of preferred stocks (if any) calculated using the if-converted method.
The table below shows the calculations for the three and six months ended June 30, 2023 and 2022 (in thousands, except for per share data):
Three Months Ended June 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Numerator (both basic and diluted) | ||||||||||||||
Net income (loss) relevant to common stockholders | $ | $ | ( |
|||||||||||
Denominator | ||||||||||||||
Denominator for basic income per share | ||||||||||||||
Dilutive effect of stock options | ||||||||||||||
Dilutive effect of performance share units | ||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||
Denominator for diluted income per share | ||||||||||||||
Basic income (loss) per common share | $ | $ | ( |
|||||||||||
Diluted income (loss) per common share | $ | $ | ( |
Six Months Ended June 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Numerator (both basic and diluted) | ||||||||||||||
Net income (loss) relevant to common stockholders | $ | $ | ( |
|||||||||||
Denominator | ||||||||||||||
Denominator for basic income per share | ||||||||||||||
Dilutive effect of stock options | ||||||||||||||
Dilutive effect of performance share units | ||||||||||||||
Dilutive effect of restricted stock units | ||||||||||||||
Denominator for diluted income per share | ||||||||||||||
Basic income (loss) per common share | $ | $ | ( |
|||||||||||
Diluted income (loss) per common share | $ | $ | ( |
-17-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income (Loss) Per Share (Continued)
(in thousands) | Three Months Ended June 30, | |||||||||||||
2023 | 2022 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
(in thousands) | Six Months Ended June 30, | |||||||||||||
2023 | 2022 | |||||||||||||
Stock options | ||||||||||||||
Restricted stock units | ||||||||||||||
Performance stock units | ||||||||||||||
Total |
Note 9 - Share Repurchase Program
On May 17, 2023, the Company's board of directors (the "Board") authorized and the Company announced a share repurchase program that allows the Company to repurchase up to $100 million of the Company's common stock beginning immediately and continuing through and including May 31, 2024. The shares may be repurchased from time to time in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including management's assessment of the intrinsic value of the Company's common stock, the market price of the Company's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases using cash on hand and expected free cash flow to be generated through May 2024. The Inflation Reduction Act of 2022 (the "IRA 2022") provides for, among other things, the imposition of a new 1% U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. corporations such as us after December 31, 2022. Accordingly, the excise tax will apply to our share repurchase program in 2023 and in subsequent taxable years.
All shares of common stock repurchased under the share repurchase program are canceled and retired upon repurchase. The Company accounts for the purchase price of repurchased shares of common stock in excess of par value ($0.001 per share of common stock) as a reduction of additional-paid-in capital, and will continue to do so until additional paid-in-capital is reduced to zero. Thereafter, any excess purchase price will be recorded as a reduction to retained earnings. During the three months ended June 30, 2023, the Company paid an aggregate of $17.5 million, an average price per share of $7.63 including commissions, for share repurchases under the share repurchase program. The Company has accrued $0.1 million in respect of the IRA 2022 repurchase excise tax as of June 30, 2023. As of June 30, 2023, $82.5 million remained authorized for future repurchases of common stock under the repurchase program.
Note 10 - Stock-Based Compensation
Stock Options
There were no new stock option grants during the six months ended June 30, 2023. As of June 30, 2023, there was no aggregate intrinsic value for our outstanding or exercisable stock options because the closing stock price as of June 30, 2023 was below the cost to exercise these options. No stock options were exercised during the six months ended June 30, 2023. The weighted average remaining contractual term for the outstanding and exercisable stock options as of June 30, 2023 was approximately 2.9 years.
-18-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
A summary of the stock option activity for the six months ended June 30, 2023 is presented below (in thousands, except for weighted average price):
Number of Shares | Weighted Average Exercise Price |
|||||||||||||
Outstanding at January 1, 2023 | $ | |||||||||||||
Granted | $ | |||||||||||||
Exercised | $ | |||||||||||||
Forfeited | $ | |||||||||||||
Expired | ( |
$ | ||||||||||||
Outstanding at June 30, 2023 | $ | |||||||||||||
Exercisable at June 30, 2023 | $ |
Restricted Stock Units
During the six months ended June 30, 2023, we granted 1,072,575 restricted stock units ("RSUs") to employees, officers and directors pursuant to the ProPetro Holding Corp. 2020 Long Term Incentive Plan (the "2020 Incentive Plan"), which generally vest ratably over a three-year vesting period, in the case of awards to employees and officers, and generally vest in full after one year , in the case of awards to directors. RSUs are subject to restrictions on transfer and are generally subject to a risk of forfeiture if the award recipient ceases to be an employee or director of the Company prior to vesting of the award. Each RSU represents the right to receive one share of common stock. The grant date fair value of the RSUs is based on the closing share price of our common stock on the date of grant. As of June 30, 2023, the total unrecognized compensation expense for all RSUs was approximately $14.4 million, and is expected to be recognized over a weighted average period of approximately 2.0 years.
The following table summarizes RSUs activity during the six months ended June 30, 2023 (in thousands, except for fair value):
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||||||||
Outstanding at January 1, 2023 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | ( |
$ | ||||||||||||
Forfeited | ( |
$ | ||||||||||||
Canceled | $ | |||||||||||||
Outstanding at June 30, 2023 | $ |
Performance Share Units
During the six months ended June 30, 2023, we granted 454,788 performance share units ("PSUs") to certain key employees and officers as new awards under the 2020 Incentive Plan. Each PSU earned represents the right to receive either one share of common stock or, as determined by the 2020 Incentive Plan administrator in its sole discretion, a cash amount equal to fair market value of one share of common stock or amount of cash on the day immediately preceding the settlement date. The actual number of shares of common stock that may be issued under the PSUs ranges from 0 % up to a maximum of 200 % of the target number of PSUs granted to the participant, based on our total shareholder return ("TSR") relative to a designated peer group, generally at the end of a three year period. In addition to the TSR conditions, vesting of the PSUs is generally subject to the recipient’s continued employment through the end of the applicable performance period. Compensation expense is recorded ratably over the corresponding requisite service period. The grant date fair value of PSUs is determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until performance relative to the peer group has been determined following the completion of the performance period and shares have been issued.
-19-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Stock-Based Compensation (Continued)
The following table summarizes information about PSUs activity during the six months ended June 30, 2023 (in thousands, except for weighted average fair value):
Period Granted |
Target Shares Outstanding at January 1, 2023 | Target Shares Granted |
Target Shares Vested | Target Shares Forfeited |
Target Shares Outstanding at June 30, 2023 | |||||||||||||||||||||||||||
2020 | ( |
( |
||||||||||||||||||||||||||||||
2021 | ||||||||||||||||||||||||||||||||
2022 | ||||||||||||||||||||||||||||||||
2023 | ||||||||||||||||||||||||||||||||
Total | ( |
( |
||||||||||||||||||||||||||||||
Weighted Average FV Per Share | $ | $ | $ | $ | $ |
Note 11 - Related-Party Transactions
Operations and Maintenance Yards
The Company rents five yards from an entity in which a director of the Company has an equity interest, and the total annual rent expense for each of the five yards was approximately $0.03 million, $0.03 million, $0.1 million, $0.1 million and $0.2 million, respectively.
Pioneer
On December 31, 2018, we consummated the purchase of certain pressure pumping assets and real property from Pioneer Natural Resources USA, Inc. ("Pioneer") and Pioneer Pumping Services (the "Pioneer Pressure Pumping Acquisition"). In connection with the Pioneer Pressure Pumping Acquisition, Pioneer received 16.6 million shares of our common stock and approximately $110.0 million in cash. On March 31, 2022, we entered into an amended and restated pressure pumping services agreement (the "A&R Pressure Pumping Services Agreement"), which was initially entered into in connection with the Pioneer Pressure Pumping Acquisition. The A&R Pressure Pumping Services Agreement was effective January 1, 2022 through December 31, 2022. The A&R Pressure Pumping Services Agreement reduced the number of contracted fleets from eight fleets to six fleets, modified the pressure pumping scope of work and pricing mechanism for contracted fleets, and replaced the idle fees arrangement with equipment reservation fees (the "Reservation fees"). As part of the Reservation fees arrangement, the Company was entitled to receive compensation for all eligible contracted fleets that were made available to Pioneer at the beginning of every quarter in 2022 through the term of the A&R Pressure Pumping Services Agreement. The A&R Pressure Pumping Services Agreement expired at the conclusion of its term and was replaced by the Fleet One Agreement and Fleet Two Agreement described below.
On October 31, 2022, we entered into two pressure pumping services agreements (the "Fleet One Agreement" and "Fleet Two Agreement") with Pioneer, pursuant to which we will provide hydraulic fracturing services with two committed fleets, subject to certain termination and release rights. The Fleet One Agreement was effective as of January 1, 2023 and will terminate on August 31, 2023. The Fleet Two Agreement was effective as of January 1, 2023 and was terminated on May 12, 2023.
Revenue from services provided to Pioneer (including Reservation fees) accounted for approximately $45.4 million and $115.2 million of our total revenue during the three months ended June 30, 2023 and 2022, respectively. Revenue from services provided to Pioneer (including Reservation fees) accounted for approximately $99.7 million and $238.7 million of our total revenue during the six months ended June 30, 2023 and 2022, respectively.
As of June 30, 2023, the total accounts receivable due from Pioneer, including estimated unbilled receivable for services we provided, amounted to approximately $16.6 million and the amount due to Pioneer was $0 . As of December 31, 2022, the balance due from Pioneer for services we provided amounted to approximately $46.2 million and the amount due to Pioneer was $0 .
-20-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases
Operating Leases
Description of Lease
In March 2013, we entered into a ten-year real estate lease contract (the "Real Estate One Lease") with a commencement date of April 1, 2013, as part of the expansion of our equipment yard. During the six months ended June 30, 2023 and 2022, the Company made lease payments of approximately $0.1 million and $0.2 million, respectively. The assets and liabilities under this contract are included in our Completion Services reportable segment. In addition to the contractual lease period, the contract included an optional renewal of up to ten years , however, the Company terminated the Real Estate One Lease at the end of the term, March 1, 2023.
We accounted for our Real Estate One Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Real Estate One Lease because we concluded that the accounting effect was insignificant.
As part of our expansion of our hydraulic fracturing equipment maintenance program, we entered into a two year maintenance facility real estate lease contract (the "Maintenance Facility Lease") with a commencement date of March 14, 2022. During the six months ended June 30, 2023 and 2022, the Company made lease payments of approximately $0.2 million and $0.1 million, respectively. In addition to the contractual lease period, the contract includes an optional renewal for three additional periods of one year each, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Maintenance Facility Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for our Maintenance Facility Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Maintenance Facility Lease because we concluded that the accounting effect was insignificant. As of June 30, 2023, the weighted average discount rate and remaining lease term was approximately 3.4 % and 0.7 years, respectively.
In August 2022 and December 2022, we entered into four electric hydraulic fracturing fleets with 60,000 hydraulic horsepower ("HHP") per fleet. The Electric Fleet Leases contain an option to purchase the equipment after the initial -year term for each lease. The Electric Fleet Leases have not yet commenced. We currently do not control the assets under the Electric Fleet Leases because they are currently being manufactured by the vendor and we have not taken possession of the assets. The delivery of the electric fleets is as each fleet is manufactured and we currently expect to take delivery of most of the electric fleets in the second half of 2023. Given that the Company has not yet taken possession of the assets under the Electric Fleet Leases, the Company has not accounted for the right of use and lease obligation on its balance sheet as of June 30, 2023. year equipment leases (the "Electric Fleet Leases") for a total of
In October 2022, we entered into a real estate lease contract for 5.3 years (the "Real Estate Two Lease"), with a commencement date of March 1, 2023. During the six months ended June 30, 2023, the Company made lease payments of approximately $0.1 million. The assets and liabilities under this contract are included in our Completion Services reportable segment. In addition to the contractual lease period, the contract includes two optional renewals of one year each, and in management's judgment the exercise of the renewal option is not reasonably assured. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Real Estate Two Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for our Real Estate Two Lease as an operating lease. Our assumptions resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Real Estate Two Lease because we concluded that the accounting effect was insignificant. As of June 30, 2023, the weighted average discount rate and remaining lease term was approximately 6.3 % and 4.8 years, respectively.
As part of the Silvertip Acquisition, we assumed two real estate leases (the "Silvertip One Lease" and "Silvertip Two Lease," and collectively the "Silvertip Leases") with remaining terms of 4.8 years and 6.1 years, respectively, from the Silvertip Acquisition Date. During the six months ended June 30, 2023, we extended the Silvertip One Lease for an additional 1.3 years. During the six months ended June 30, 2023, the Company made lease payments of approximately $0.1 million and $0.2 million on the Silvertip One Lease and Silvertip Two Lease, respectively. The assets and liabilities under these contracts are recorded in our wireline operating segment within our Completion Services reportable segment. The Silvertip Leases do not have any renewal options, residual value guarantees, covenants or financial restrictions. Further, the Silvertip Leases do not contain variability in payments resulting from either an index change or rate change.
-21-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
We accounted for the Silvertip One Lease and the Silvertip Two Lease as operating leases. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Silvertip Leases because we concluded that the accounting effect was insignificant. As of June 30, 2023, the weighted average discount rate and remaining lease term for the Silvertip One Lease was approximately 6.3 % and 5.4 years, respectively. As of June 30, 2023, the weighted average discount rate and remaining lease term for the Silvertip Two Lease was approximately 2.1 % and 5.4 years, respectively.
In January 2023, we entered into a three year equipment lease (the "Power Equipment Lease") for certain power generation equipment. The Power Equipment Lease has not yet commenced. We currently do not control the assets under the lease and have not taken possession of the assets. Therefore, the Company has not accounted for the right of use and lease obligation in its balance sheet as of June 30, 2023.
In March 2023, we entered into a real estate lease contract for 5.7 years (the "Silvertip Three Lease"), with a commencement date of April 1, 2023. During the six months ended June 30, 2023, the Company made lease payments of approximately $0.03 million on the Silvertip Three Lease. The assets and liabilities under this contract are recorded in our wireline operating segment within our Completion Services reportable segment. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Silvertip Three Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for the Silvertip Three Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. We did not account for the land separately from the building of the Silvertip Three Lease because we concluded that the accounting effect was insignificant. As of June 30, 2023, the weighted average discount rate and remaining lease term was approximately 6.3 % and 5.4 years, respectively.
In June 2023, we entered into an office space lease contract for 5.0 years (the "Silvertip Office Lease"), with a commencement date of June 1, 2023. During the six months ended June 30, 2023, the Company made lease payments of approximately $0.01 million on the Silvertip Office Lease. The assets and liabilities under this contract are recorded in our wireline operating segment within our Completion Services reportable segment. The contract does not include a residual value guarantee, covenants or financial restrictions. Further, the Silvertip Office Lease does not contain variability in payments resulting from either an index change or rate change.
We accounted for the Silvertip Office Lease as an operating lease. This conclusion resulted from the existence of the right to control the use of the assets throughout the lease term. As of June 30, 2023, the weighted average discount rate and remaining lease term was approximately 6.5 % and 4.9 years, respectively.
As of June 30, 2023, the total operating lease right-of-use asset cost was approximately $7.8 million, and accumulated amortization was approximately $2.1 million. As of December 31, 2022, our total operating lease right-of-use asset cost was approximately $4.6 million, and accumulated amortization was approximately $1.5 million. For the six months ended June 30, 2023 and 2022, we recorded operating lease cost of approximately $0.7 million and $0.3 million, respectively, in our statements of operations.
-22-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Leases (Continued)
Maturity Analysis of Lease Liabilities
The maturity analysis of liabilities and reconciliation to undiscounted and discounted remaining future lease payments for our operating lease as of June 30, 2023 are as follows:
(in thousands) | Totals | |||||||
2023 | $ | |||||||
2024 | ||||||||
2025 | ||||||||
2026 | ||||||||
2027 | ||||||||
2028 | ||||||||
Total undiscounted future lease payments | ||||||||
Less: amount representing interest | ( |
|||||||
Present value of future lease payments (lease obligation) | $ |
The total cash paid for amounts included in the measurement of our operating lease liability during the six months ended June 30, 2023 was approximately $0.7 million. During the six months ended June 30, 2023, we recorded a non-cash lease obligation totaling approximately $3.1 million as a result of our execution of the Real Estate Two Lease, the Silvertip Three Lease and the Silvertip Office Lease and our extension of the Silvertip One Lease. During the six months ended June 30, 2022, total cash paid for amounts included in the measurement of our operating lease liability was approximately $0.3 million. During the six months ended June 30, 2022, we recorded a non-cash lease obligation of approximately $0.6 million as a result of our execution of the Maintenance Facility Lease.
Short-Term Leases
Note 13 - Commitments and Contingencies
Commitments
We entered into certain commitments for fixed assets, consumables and services incidental to the ordinary conduct of our business, generally for quantities required for our operations and at competitive market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. We entered into contractual arrangements with our equipment manufacturers to purchase and convert Tier IV DGB equipment, with total cost of approximately $16.4 million for the remainder of 2023. We also entered into the Electric Fleet Leases, which contain options to extend the leases or purchase the equipment at the end of each lease. The lease payments are expected to commence when the Company takes possession of the electric hydraulic fracturing fleets. We currently expect to take delivery of most of the electric hydraulic fracturing fleets in the second half of 2023. The total estimated contractual commitment in connection with the Electric Fleet Leases is approximately $96.4 million, which excludes the cost associated with the option to purchase the equipment at the end of each lease. We also entered into the Power Equipment Lease. The total estimated contractual commitment in connection with the Power Equipment Lease is approximately $59.6 million.
The Company enters into purchase agreements with its sand suppliers (the "Sand Suppliers") to secure supply of sand as part of its normal course of business. The agreements with the Sand Suppliers require that the Company purchase a minimum volume of sand, based primarily on a certain percentage of our sand requirements from our customers or in certain situations based on predetermined fixed minimum volumes, otherwise certain penalties (shortfall fees) may be charged. The shortfall fee represents liquidated damages and is either a fixed percentage of the purchase price for the minimum volumes or a fixed price per ton of unpurchased volumes. Our agreements with the Sand Suppliers expire at different times prior to December 31, 2025. Our sand agreement with one of our Sand Suppliers that will expire on December 31, 2024 has a remaining take-or-pay commitment of $29.2 million. During the six months ended June 30, 2023 and 2022, no shortfall fee was recorded.
-23-
PROPETRO HOLDING CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 - Commitments and Contingencies (Continued)
As of June 30, 2023, the Company had issued letters of credit of approximately $6.0 million under the ABL Credit Facility in connection with the Company’s casualty insurance policy.
Contingent Liabilities
Legal Matters
In September 2019, a complaint, captioned Richard Logan, Individually and On Behalf of All Others Similarly Situated, Plaintiff v. ProPetro Holding Corp., et al., (the "Logan Lawsuit"), was filed against the Company and certain of its then current and former officers and directors in the U.S. District Court for the Western District of Texas. As amended by later complaints, the Logan Lawsuit asserted claims on behalf of a putative class of shareholders who purchased the Company’s common stock between March 17, 2017 and March 13, 2020 or purchased the Company's common stock pursuant to the Company's initial public offering in March 2017. Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule l0b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act of 1933 against the Company, certain former officers and current and former directors, alleging that the defendants made allegedly inaccurate or misleading statements or omissions about the Company's business, operations and prospects. On August 11, 2022, the Company entered into a settlement of the Logan Lawsuit, pursuant to which the Company's insurers have paid a cash sum into a settlement fund to be distributed to members of the putative class. On May 11, 2023, the settlement was granted final court approval.
Environmental and Equipment Insurance
The Company is subject to various federal, state and local environmental laws and regulations that establish standards and requirements for protection of the environment. The Company cannot predict the future impact of such standards and requirements, which are subject to change and can have retroactive effectiveness. The Company continues to monitor the status of these laws and regulations. Currently, the Company has not been fined, cited or notified of any environmental violations that would have a material adverse effect upon its financial position, liquidity or capital resources. However, management does recognize that by the very nature of the Company's business, material costs could be incurred in the near term to maintain compliance. The amount of such future expenditures is not determinable due to several factors, including the unknown magnitude of possible regulation or liabilities, the unknown timing and extent of the corrective actions which may be required, the determination of the Company's liability in proportion to other responsible parties and the extent to which such expenditures are recoverable from insurance or indemnification.
The Company is self-insured up to $10 million per occurrence for certain losses arising from or attributable to fire and/or explosion at the wellsites. No accrual was recorded in our financial statements in connection with this self-insurance strategy because the occurrence of fire and/or explosion cannot be reasonably estimated.
Regulatory Audits
In 2020, the Texas Comptroller of Public Accounts (the "Comptroller") commenced a routine audit of the Company's motor vehicle and other related fuel taxes for the periods of July 2015 through December 2020. As of June 30, 2023, the audit is still ongoing and the final outcome cannot be reasonably estimated.
In May 2022, the Company received a notification from the Comptroller that it will commence a routine audit of the Company's